NYT Excerpt: The Case For Simple Bank Rules

In his New York Times Magazine column this week, Adam Davidson writes that, five years after the financial crisis, it's as hard as ever to figure out whether the financial industry is healthy. Here's an excerpt.

A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I've spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn't resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates....

Paul Schultz, director of the Center for the Study of Financial Regulation at the University of Notre Dame, led a project that brought together scholars of financial regulation from the left, the right and the center to figure out what caused the financial crisis and how to prevent a sequel. They couldn't agree on anything, he told me. But a great majority favored higher equity requirements, which is bankerspeak for the notion that banks shouldn't be allowed to borrow so much.

I conducted my own Schultz test by talking to Anat Admati and Charles Calomiris, prominent finance professors at Stanford and Columbia, respectively, who roughly define the opposite ends of the argument over bank regulation. Admati is a Democrat, Calomiris a Republican. In her recent book, "The Bankers' New Clothes," for example, Admati has argued that bankers misrepresent their finances. Calomiris, who used to be a banker, is generally seen as friendly to the field. As I spoke to them both, they also disagreed on everything until the conversation turned to borrowing. At which point, they independently explained that banks borrow too much, that the government rules are too confusing and that the public has been misled.